What's next for Apple's €13bn tax battle?

In the wake of last month’s controversial decision by the European Commission to seek “recovery of illegal state aid” for alleged unpaid taxes in Ireland from Apple of up to €13bn – plus interest – the European competition commissioner, Margrethe Vestager, went to the United States this week on a “charm offensive” to make her case to government officials, lawmakers and trade officials.

Vestager met with US treasury secretary Jacob Lew, had a closed-door session with members of the US Senate finance committee, and spoke at the Global Antitrust Enforcement Symposium at Georgetown University, where she gave a vigorous defense of the EC’s decision.

“Our rules don’t stop governments applying a low tax rate to every company,” she said in the speech. “What they can’t do is to select just a few favored businesses and give them special treatment which their rivals can’t get. So when we ask national governments to reclaim unpaid taxes, all we’re doing is ensuring that everyone has an equal opportunity.

“That is only fair. And I think that’s what people expect of their public authorities. Not to get cozy with special interests, but to have the courage to defend the public interest. And that’s an area where competition enforcers can lead by example.”

So far, however, reaction to her visit – and her comments – has been more offense than charm.

The Senate finance committee chairman, Orrin Hatch, a Republican from Utah, met with Vestager in advance of her meeting with the bipartisan Senate committee and was moved to make a statement about the meeting.

“Rather than working with countries to strengthen the international tax framework and improve the rule of law, the European commission, in its recent state aid ruling, opted to run roughshod over an American firm by retroactively overriding a tax opinion between a sovereign country and a company,” he said.

“Though our meetings were cordial, the commissioner failed to build an effective case for this highly politicized ruling rooted in an erroneous interpretation of law, underscoring the need for additional action in international courts.”

Technology industry advocates and analysts echoed this view. Dean Garfield, president and CEO of the Washington DC-based technology industry advocacy group ITIC (Information Technology Industry Council), said that members of his group (which includes Amazon, Apple, Dell, EMC, Facebook, Google, HP, Intel and Microsoft) did not think Vestager’s visit will have much of an impact.

“It hasn’t changed anything,” he said. “It’s aimed at explaining and putting in context what is largely inexplicable.” Personal rapport, he said, is helpful to work through difficult trade issues, “so a degree of familiarity and trust is helpful, but the policy implications remain the same”.

Technology industry analyst Tim Bajarin, president and principal analyst of San Jose-based Creative Strategies, was even more blunt. “Every major company we deal with has the same basic position – it’s sensitive for them to speak out, but as far as they are concerned, they have paid every tax they legally owe,” he said. “A retroactive tax just doesn’t sit well with anyone here in the US.”

Bajarin, who has been advising US technology companies for more than 30 years, also offers a historical perspective based on his own work with those companies when they were being courted by Ireland’s Industrial Development Agency (IDA) to make a move to Ireland in the first place. “Had they not built this program, they would not have built a tech industry in Ireland,” he said.

He also said that he was surprised by the European commission’s decision to seek retroactive taxes, since the EU was well aware of the IDA’s work with Apple and other technology companies from the start. “From when they first did the program, they got the EU’s approval – and nobody had any problems with it for almost 30 years.”

Bajarin also suggested that it loses sight of why tax incentives were offered in the first place. “Parents were getting upset with the Irish government [because there was no significant technology sector in Ireland] and their kids would leave. That was a huge issue and why the Irish government created this program – so Irish kids would have jobs in the tech industry. And it was very successful,” he said. When Silicon Valley started booming, the IDA opened an office in San Francisco and pitched everything around tax, he explains.

Yet despite concerns about the European commission’s decision on Apple, virtually all of the players on the US side of the discussion concede that tax reform in the United States is part of the solution. Hatch weighed into the issue in his comments on the meeting with Vestager.

“We must do our part to address the anti-competitive nature of the US tax code and the impact it has had on our domestic job creators both here and abroad,” Hatch said. “Lowering the corporate tax burden and shifting to a territorial regime with base erosion protections will help shift our economic landscape and produce fertile ground for more businesses to invest here at home. It’s an achievable, bipartisan goal that holds great promise, should we get a willing partner in the White House.”

Garfield concurred. “The best way to address this is to address the tax code and not to address the rules in the middle of the game,” he said, suggesting that no government should be making retroactive calls on taxation issues.

Garfield also said he hoped that both of the leading candidates for the US presidency would recognize the importance of dealing with tax reform. “Tax reform should not be a political football,” he added. “The need for change is compelling and should be something all parties should agree on.”

Apple’s CEO, Tim Cook, commented on tax reform following the European commission ruling. “Apple has long supported international tax reform with the objectives of simplicity and clarity. We believe these changes should come about through the proper legislative process, in which proposals are discussed among the leaders and citizens of the affected countries. And as with any new laws, they should be applied going forward – not retroactively,” he said.

Vestager’s US visit continues on Wednesday with a speech at New York’s Columbia University called “Tax avoidance and privacy in the digital age: an EU perspective”. She also issued a statement clarifying the commission’s definition of “state aid” as part of the announcement of a finding on Wednesday that found that “five public measures for purely local operations in Spain, Germany and Portugal involve no state aid because they are unlikely to affect trade between member states” and will thus not be the subject of any commission action.

“In many cases member states can stimulate investment without asking the commission,” she said. “These decisions confirm that many local public support measures do not constitute state aid. This reflects the Juncker Commission’s approach to be ‘big on big things and small on small things’.”